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The Jones Act and export of crude oil and LNG from the USA

Publication | March 2016

New US legislation allows crude oil produced in the US to be exported, eliminating a 40 year-old ban on US crude oil exports. Some discussion about this significant change in US law has centered around the impact of the Jones Act on the export of US crude oil and whether the new law should require US flag ships to carry these exports. This article will provide overviews of the Jones Act, the new legislation permitting crude oil exports, and the effect of the Jones Act on exports of US crude oil and LNG.

Coastwise trade under the Jones Act

The Jones Act, also known as the Merchant Marine Act of 1920, refers to US legislation that reserves US coastwise transportation to particular US flag ships that have a “coastwise endorsement” on their US Certificate of Documentation1. The Jones Act is a form of trade protection. It was enacted in 1920, with the specific purpose of promoting a strong US merchant marine trade, to aid US shipbuilding facilities and to encourage use of US merchant marine ships that are owned and crewed by US citizens, sufficient for waterborne domestic commerce, adequate for shipping in foreign commerce, and capable of supporting national defense interests.The US is not alone in putting in place laws protecting its coastwise trade. Many other countries have cabotage laws that restrict participation in their own coastwise trade. The trade protection principles of the Jones Act were not new in 1920. Earlier versions of laws protecting US coastwise transportation have been in place since the first US Congress enacted legislation in 1789.

The Jones Act requires that “transportation of merchandise by water, or by land and water, between points in the United States . . . either directly or via a foreign port” must be carried by ships with a US “coastwise endorsement.” A similar provision protects, in the same way, coastwise transportation of passengers between US ports and places.

To obtain a US coastwise endorsement, a ship must be registered in the US, built in a US shipyard (with a few exceptions, such as ships captured in war), and owned and operated by Jones Act qualified US citizens. A Jones Act qualified citizen is a person who is a US citizen or an entity that is at least 75 percent owned by US citizens. The citizenship threshold to obtain US flag registration, without a coastwise endorsement, requires only that a controlling majority of equity interest be owned by US citizens. The US citizen ownership criteria apply at each tier of the ship’s ownership structure.

The Jones Act, and some of its implementing regulations promulgated by the US Coast Guard, prescribe details for determining citizenship status of owner entities that are a corporation, a partnership, a trust, or an association or joint venture. For example, a corporation’s CEO, the chairman of its board of directors, and a majority of a quorum of its directors must all be US citizens. Statutory exceptions to the Jones Act permit non-coastwise endorsed ships to carry cargo from a US port to the Virgin Islands and some other US territories.

Export of crude oil and LNG

The Jones Act does not apply to the export of crude oil and LNG produced in the US because export trade is not coastwise trade. Therefore, a ship carrying crude oil or LNG for export from a US port to a non-US destination is not required to have a coastwise trade endorsement under the Jones Act. In general, even non-US flag ships can carry these export trade cargoes.

Until recently, US legislation prohibited the export of crude oil produced in the US. Congress enacted a ban on US crude oil exports in 1975, in the wake of the Arab oil embargo. The recent legislation that effectively repeals the 40-year old export ban is the Consolidated Appropriations Act, 2016 (the 2016 Act), signed into law on December 18, 2015. Section 101(b) of the 2016 Act says that “no official of the Federal Government shall impose or enforce any restrictions on the export of crude oil.” However, the 2016 Act preserves the President’s ability to restrict crude oil exports in response to a national emergency and to enforce trade sanctions. It permits the President to impose limited export licensing requirements or other restrictions in a national emergency, to enforce trade sanctions, or if crude oil exports cause oil supply shortages or price increases that adversely affect US employment.

An exception to the export ban was already enacted in 1995 that permitted export of US crude oil produced from the Alaskan North Slope, referred to as ANS Oil. The 1995 law required exported ANS Oil to be carried on US flag ships. The 2016 Act does not mention ANS Oil or the 1995 legislation. Arguably, although this is not certain, the 2016 Act supersedes the 1995 law so that ship flag restrictions no longer apply to export of ANS Oil.

The Jones Act was a topic in the discussion about whether Congress should allow US crude oil to be exported. Proposals were asserted that might have required US crude oil exports to be carried on US flag ships, or even to amend or repeal the Jones Act in connection with repealing the export ban. Ultimately, however, the 2016 Act does not restrict ships registered outside the US from carrying exported US crude oil, and the 2016 Act makes no amendment to the Jones Act. Similarly, for export of LNG produced in the US, there are no legislative restrictions that prevent ships registered outside the US from carrying LNG in this export trade.

1 The term “Jones Act” sometimes refers to a different provision in the Merchant Marine Act of 1920 - the part that permits injured ship crewmembers, commonly called “Jones Act seamen,” to sue their employer for negligence. This article addresses only the coastwise trade provisions in the Jones Act.